The Mineta Transportation Institute held its annual policy summit last week at the Commonwealth Club. I have a background in both transportation and finance so I couldn't miss a chance to connect the two over a free breakfast. I got there so early I actually walked in right behind former Secretary Norman Mineta himself. I didn't speak with him because I'm just another commoner and there's no way he can do me any favors unless I write a big check to his institute. I'd rather hear what his invited policy wonks have to say, free of charge.
The first agenda item was an address from USDOT's acting General Counsel Kathryn B. Thomson. She briefly mentioned ARRA's $48B commitment to critical infrastructure but I'm concerned about whether it's being used effectively. She also mentioned a couple of programs that I think should be excellent candidates for consolidation into a national infrastructure bank. The first is the TIFIA program of loans and other credit instruments specifically for surface transportation. The other is the TIGER grant program for multiple transportation modes. If USDOT's approach to favoring public-private partnerships is correct, then an infrastructure bank that issues bonds linked to these programs is the way to go. I do see a potential hurdle in that federal highway improvements are funded by the Highway Trust Fund's revenue from the federal gasoline tax. Moving all federal infrastructure projects into a national infrastructure bank's inventory means revising the enabling legislation for every federal tax on transportation modes.
Ms. Thomson made us aware that federal gas taxes can no longer be the single funding source for our transportation needs. Hybrid cars use little gas and pure EVs use none, but their battery packs make them heavier than gasoline-powered cars. That's simple physics, folks, because the energy storage capacity of liquid hydrocarbons is denser than that of lead-acid or lithium-ion batteries. Heavy hybrids and EVs will wear out our roads faster. Here's my idea. Instead of a knee-jerk funding commitment to every meter of highway in the federal inventory, why not "red-line" those segments that are seldom used? Cities like Detroit and Stockton will have to downsize and unwind much of their development, allowing USDOT planners to declare some roads too costly to maintain. This is why ARRA's blanket approach to funding unmet "needs" has given me pause for some time. A planner may mark a road for the "need" column even if it leads into an urban area that deserves to be torn up and unbuilt.
The Q&A for Ms. Thomson was revealing. The USDOT favors California's high-speed rail program. IMHO federal planners are blind to that program's cost overruns, unneeded stops in rural towns, and pork payoffs. My ideal high-speed rail system for the Golden State would link no more than six cities: Sacramento, Oakland, San Francisco, San Jose, Los Angeles, and maybe San Diego. Anything more adds transit delays and costs. Nobody asked me to contribute, so of course we're getting a more expensive system than we need. Federal matching funds for high-speed rail make it too easy for state planners to add unneeded segments. Smart leaders in Ohio, Wisconsin, and Florida have turned down federal matching funds for high-speed rail since 2010. This unfortunately makes it easier for California to gorge at the federal trough instead of scaling down its own high-speed rail plans.
One comment gave me hope that there is room for disruption in the transportation sector. Positive Train Control (PTC) is an expensive mandate but the railroad industry is making progress to meet the 2015 deadline specified in the Rail Safety Improvement Act of 2008. The thousands of wireless devices and monitoring systems needed for PTC represent a great opportunity for entrepreneurs.
The next panel had experts from several different entities. I think they could have benefited from having a member of the National Research Council's Transportation Research Board (TRB) on the panel. I've been receiving the TRB's emails for years ever since I expressed an interest in joining the board. TRB puts out tons of white papers that should inform both the private developers who build near transportation infrastructure and the public policy planners who take development into account. The panel believed that public infrastructure and private development attract each other but they did little to enlighten us on the nuts and bolts of project finance. They spent little time addressing how projects could be funded but gave detailed coverage to MTI's latest study on how tax options can be sold to the public. Come on, folks, even USDOT just admitted there's more to transportation finance than gas tax increases.
It's time for me to go out on a limb, as I am wont to do. A public that lacks understanding of how its transportation priorities are determined will eventually get as riled up over transit tax increases as Brazil's current protesters. Fare increases set off the Brazil protests but they have a long list of other grievances. The American public needs to see benefits that impact them personally and emotionally if they're going to buy into a sales pitch. Only developers will be convinced by a transportation project's ROI, although that's important to demonstrate. That MTI survey shows that the gax tax appeal rests on resolving users' pain points.
The panel noted that the MAP-21 legislation will not be sufficient to fully fund the nation's needs for public transit. The full commitment for a public transit system that meets the nation's needs is a one-time cost of $70B. Even this doesn't account for pay-as-you-go funding of long-term sustainment. The panel acknowledged that federal funding will shift to favor those state projects that can demonstrate self-funding, which to me implies user fees. Some combination of a state gas tax, usage fees, general fund revenue, sales taxes, vehicle registration fees, naming rights, development fees, tolling, and other public/private hybrid solutions are inevitable in California. This combined funding mechanism needs to be in place far in advance of any further work on high-speed rail. Private investment committed too early to a public project, as the panel noted, will discount the project's completion too heavily and make it nonviable if future private funding is unavailable.
I did not hear one single comment during this entire forum on inland water transportation or port infrastructure. California has two of America's busiest ports - Oakland and Long Beach - and many ports in the country need regular dredging to remove buildups of silt that degrade their deepwater shipping channels. Port cargo throughput ability will be a serious national security enabler in the event of any major mobilization. NDTA keeps me updated on the lack of progress addressing this potential bottleneck at critical ports. America's inland waterways need serious upgrades to their locks and dams so barge traffic that supports the petrochemical and agricultural sectors can proceed unimpeded. The members of the American Waterways Operators know just how much they depend on the US Army Corps of Engineers to keep their traffic flowing. If you don't believe me, review the USDA's Agricultural Marketing Service data on barge rates for agricultural transportation. Take a guess at how much higher those rates would be if inland waterways are degraded or congested for lack of infrastructure repair.
I should not have been surprised that the panelists did not answer the question I submitted on transportation finance. I wanted to know whether California agencies could sustain municipal bond issuance in the face of either rising interest rates or high inflation. I can't blame them for not wanting to touch that in light of their revelations above about the difficulty of attracting long-term finance (from bonds that fund initial capital outlays) without mechanisms for sustaining annual finance in place (from user fees and other sources). Today's ZIRP environment is ideal for raising muni bond proceeds and states will never get a break like this again in my lifetime. Rising real interest rates will soon make the cost of new capital projects astronomically high. My ideal answer to my own question would rely on state agencies issuing inflation-indexed munis. They could get really creative and issue equity in publicly financed corporations modeled after Fannie Mae and Freddie Mac, provided the State of California does not provide unlimited guarantees for those corporations' liabilities.
California needs more than just money to complete its transportation dreams. It needs creative leadership. Gov. Brown, give me a call. I'll be happy to put your state agencies on sound financial footing if you pay me for my genius.
